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Delivering the goods

Seven years ago the Dalian-based tailor Dayang Trands celebrated its 30th anniversary with a promotional film featuring a certain Warren Buffett.

“I threw away the rest of my suits,” the Berkshire Hathaway chairman confided in the video, informing viewers that his closet was now filled with custom-made outfits from Dayang.

The video sent Dayang’s stock price up 75% in a month, even though Berkshire hadn’t bought a single share in the firm.

But if Buffett took a look at Dayang’s Shanghai-listed shares today, he might get a surprise. No more a menswear maker, it has morphed instead into an Alibaba-backed delivery firm.

The transformation began in March this year when Dayang announced that it had agreed to acquire YTO Express in an all-share deal valued at Rmb17.5 billion ($2.7 billion). The backdoor listing sees YTO Express, one of China’s largest couriers, going public by taking a controlling stake in Dayang’s listed vehicle – a strategy known as buying a ‘shell’ in the financial market.

The Dayang-YTO transaction marked the convergence of two underlying trends. Firstly, the use of backdoor listings has become popular due to the lengthy wait to IPO in China’s primary market (the China Securities Regulatory Commission, or CSRC, has been cautious about permitting too many IPOs – despite a logjam of nearly 800 candidates). And secondly, the boom in the e-commerce industry has seen China’s major delivery firms desperate for funds for expansion.

In May last year Alibaba agreed to take a minority stake in YTO Express. Now, its backdoor listing is following hot on the heels of a comparable deal last December by its similarly named rival STO Express, involving a Rmb16.9 billion reverse takeover of a Shenzhen-listed valve maker.

A third delivery firm – ZTO Express – is reported to be applying for a listing in Hong Kong.

Why do all three logistics firms seem to be moving in a herd? Regular WiC readers should be familiar with the tribal instincts of many Chinese businessmen, who tend to bond together, particularly if they share the same hometown (see WiC261). Many counties and towns have devoted themselves to a single commercial pursuit too (see WiC324). And for the delivery firms, both rules apply: Tonglu, a small county of 400,000 people in Zhejiang province is home to YTO, STO and ZTO (aka Yuantong, Shentong and Zhongtong).

Collectively known as the ‘Three Tongs’, each of the companies have bosses from Tonglu and they are all headquartered in the same district in Shanghai. The ‘Tonglu Gang’ are major players in e-commerce – with a dominant market share delivering packages bought online to consumer’s homes – but the Three Tongs are trying to move into more lucrative markets, especially business orders, a niche segment led by a common rival in SF Express.

The Three Tongs’ war chest has put SF under pressure too. Its chairman Wang Wei has a reputation for turning away requests for meetings with investors (reportedly private equity firms once offered a Rmb500,000 bounty for any middleman able to arrange a dinner with him).

However, he now seems more willing to take meetings and discuss his fundraising options.

In February he appointed Citic Securities and China Merchants Securities – two state-backed firms that became shareholders in 2013 in SF’s only external fundraising to date (see WiC214 for more background on this transaction) – with these local investment banks mandated to advise him on a listing.

And last month a deal was reached – the little-known Maanshan Dingtai Rare Earth said it had agreed to a reverse takeover deal with SF Holdings, the parent firm of SF, which is also controlled by Wang.

Like many other backdoor listings, the deal involves Dingtai acquiring SF’s core business by issuing new shares. Given Dingtai’s tiny pre-deal value (roughly Rmb800 million) and SF’s much bigger size – it is now valued at Rmb43 billion – the transaction will result in Wang (via SF Holdings) owning a controlling stake in the Shenzhen-listed firm Dingtai.

Once the reverse takeover is complete, Wang plans to raise up to Rmb8 billion by selling new shares in the (post-deal) Dingtai.

SF reported a net profit of Rmb1.6 billion last year (translating into a 27 times price-to-earnings ratio) on Rmb48 billion of revenue. That said, investors will be most interested that it is predicting annual earnings growth of at least 25%. With its own aircraft fleet, SF has a fifth of the domestic air cargo market, pulling in higher-margin business from its domestic customers. To fend off potential competition SF is investing further, including building its own airport in Ezhou, a centrally-located city near Wuhan. The facility will serve as the base for its premium service for corporate customers, reaching 90% of China’s major cities with flight times of not much more than two hours.

SF also plans to expand its fleet of 39 aircraft (20 on leases) to 100 by 2020. “SF wants to build China’s logistic hub and its answer to Memphis,” the Economic Observer reports, referring to FedEx’s homebase in the United States.

The newspaper adds that the Ezhou airport alone is slated to cost Rmb15 billion and that SF has little chance of financing it if stays as a non-listed entity.

Before that can happen, SF Express will need approval for its fundraising plan from the CSRC, which has been imposing tighter rules on backdoor listings, and making them subject to more of the same requirements as conventional IPOs (see WiC326).

According to the Securities Times, the securities regulator will be more tolerant if “quality assets” are involved in the reverse takeover in question. In such special cases, the transaction may be vetted more like a merger instead of an IPO.

The regulator has been careful not to give a detailed breakdown of how “quality assets” are defined. But 21CN Business Herald believes SF has a good chance of having its deal with Dingtai approved, because it will use the proceeds to invest in the “real economy”, rather than taking the cash and stoking speculation in the property sector or in the stock market.

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